ISM Report On Manufacturing Is Not As Bad As Some Seem To Think

A few days ago, the Institute of Supply Management (ISM) released its closely watched report on manufacturing. It offered little new on the state of the economy. Media outlets noted that in November the index fell slightly from October levels and fell short of consensus expectations, which, as is usually the case, centered on the previous month’s release. That interpretation fostered some concern that the economy is softening further and inspired some to call for a near-term recession. A slightly broader view of the ISM report showed, however, that the economy has in fact stabilizing around the slowed pace of real growth exhibited by the third quarter National Income and Product Accounts, which showed real GDP growing at slightly over a 2% annual rate. If this reality disappoints those looking for stronger growth, it should also relieve any fears of an ongoing slide and an imminent turn to recession.

Statisticians at the ISM put the November index for manufacturing overall at 48.1%, down 0.2 percentage points from the 48.3% level averaged in October but up 0.3 percentage points from the September low of 47.8%. The ISM algorithm suggests that this level is consistent with annual real GDP growth of 1.5%. Combined with a non-manufacturing index pointing to real annual GDP growth of 2.0-2.5%, the picture painted by the ISM measures suggests a consolidated real GDP of around 2.0% a year, in other words little change – stronger or weaker – from the GDP growth rate published by the Commerce Department for the quarter just past. Effectively, the economic situation is neither improving nor a deteriorating.

This picture fits well with the by-now familiar story on the economy. Real growth came roaring into 2019. The ISM manufacturing index for the first three months of the year averaged 55.2%, well above recent figures and consistent with annual real GDP growth of better than 3%. As winter turned to spring, the ISM figures began to weaken, falling to 51.2% by June. They declined another 3.4 percentage points to the September low. Many commentators in the media and on Wall Street extrapolated the decline into a recession in 2020. Anything is possible, of course, but the stability since those September lows suggests that a more likely prospect is continued slow growth into 2020 and not recession.

The detail of the ISM report does more to confirm this less exciting but also less frightening prospect. The new orders figures, which had declined from earlier this year, came in for November about even with the September lows. This is a critical component of the overall index.  It would be the first to signal either a rebound or troublesome further weakness. It clearly showed neither.  Export orders, however, did offer a degree of encouragement. They jumped in November almost 7 percentage points from the September lows. It would be easy to exaggerate the significance of this gain, but it is nonetheless more welcome then a loss would be or a flat reading.  Also up, though far less dramatically, were the indices for employment and supplier deliveries. Index figures for inventories fell slightly, which no doubt held back the overall measure, but there is an encouraging aspect to this detail. It suggests that much of the softness in orders and supply shipments may reflect a rundown in existing inventories of intermediate and finished goods more than it reflects something fundamental and could, as a consequence, easily pick up in coming months as producers rebuild those stocks of inventories.

If the picture painted by the competent and efficient people at the Institute of Supply Management confirms a less robust, slower-growing economy than prevailed in 2018 and earlier this year, it also certainly confirms the picture painted by other available indicators, many of which I have reviewed in this column, that warn against an easy extrapolation of the slowdown into a near-turn recession.

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